How does dgnETH work?

dgnETH operates as a high-yield diversified ETH strategy index, utilizing a two-token model to optimize yield generation while maintaining asset stability. When users deposit ETH into dgnETH, they receive dgnETH tokens, which are pegged 1:1 to ETH and backed by a diversified basket of DeFi yield strategies. These strategies are designed to sustainably outperform traditional Liquid Staking Tokens (LSTs) by leveraging multiple yield sources without adding significant risk of loss. Users can further stake their dgnETH tokens to obtain sdgnETH, which accrues all yield generated from dgnETH’s underlying assets. This setup allows users to earn compounded rewards passively, enhancing their overall yield without the need for active management.

Where does the yield come from?

The yield generated by dgnETH and sdgnETH originates from two primary sources, each contributing approximately half of the overall yield. First, Autocompounding Pirex ETH (apxETH) involves users focusing on maximizing staking yields by depositing ETH into Pirex’s auto-compounding rewards vault. By doing so, users benefit from boosted staking yields without the need to manage their own validators. The auto-compounding mechanism ensures that all harvested yields are reinvested automatically, increasing the user’s staking rewards over time. Second, Convex ETH+/ETH involves providing liquidity to the ETH+-ETH liquidity pool on Curve and staking the resulting LP tokens on Convex. The yield from this strategy is generated through a combination of native asset yields, CVX rewards, and boosted CRV rewards leveraging Convex’s veCRV power. This dual approach not only provides stable and variable yields but also enhances overall yield through Convex’s incentivization mechanisms, ensuring sustained and optimized returns for sdgnETH holders.

What are the risks of dgnETH?

While dgnETH offers enhanced yields with a stable peg to ETH, it is not without risks. Key risks include smart contract vulnerabilities within the underlying DeFi protocols that back dgnETH, which could potentially lead to loss of funds if exploited. Additionally, the complexity of the two-token system (dgnETH and sdgnETH) may introduce operational risks, such as token management errors or liquidity issues during high market volatility. Users are also exposed to market risks associated with the performance of the underlying DeFi strategies; if these strategies underperform or encounter unforeseen challenges, the yield generation could be negatively impacted.